Aware Q2 2023 Earnings Call Transcript

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August 1, 2023

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to Awehr's Second Quarter 2023 Conference Call. Joining us today is CEO and President, Robert Eckel CFO, Dave Barcelo and CRO, Craig Herman. Following their remarks, we will open the call for questions. The call at the end of the call. Before we begin today's call, I'd like to remind everyone that the presentation today contains forward looking statements that are based the current expectations of Aware's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described.

Operator

Listeners should please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph says the major uncertainties and risks inherent in forward looking statements that management will be making the

Speaker 1

company.

Operator

Aware wishes to caution you that there are factors that could cause actual results to differ materially from those indicated by such statements. Conference call. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10 ks and quarterly reports on Form 10 Q. Any forward looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward looking statements, which speak only as of the date made.

Operator

Although it may voluntarily do so time to time. Aware undertakes no commitment to update or revise the forward looking statements whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Additionally, this call contains certain non GAAP financial measures as the term is defined by the SEC in Regulation G. Non GAAP financial measures should not be considered in isolation from or as a substitute for financial information present in compliance with GAAP. Accordingly, Aware has provided a reconciliation of these non financial measures to the most directly comparable GAAP measures in the company's earnings release issued today.

Operator

I would like to remind everyone that this presentation will be recorded and made available for replay via a link in the Investor Relations section of the company's website. Now I would like to turn the call over to Aware's CEO and President, Bob Beckel. Bob?

Speaker 2

Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market close, we issued a press release announcing our results for the Q2 ended June 30, 2023. A copy of the press release is available in the Investor Relations section of our website. On today's call, I will first discuss our financial and operational performance for the Q2.

Speaker 2

Next, I'll review the steps we've taken to drive growth and scale for Aware. Then our CFO, Dave Barcelo, will provide details on our Q2 results. After Dave's remarks, our CRO, Greg Herman will discuss our strategic initiatives to advance the company's go to market motions and increase sales. Finally, I'll review our key business drivers and 2023 outlook before opening the call for questions. Like last quarter, I'd like to start by briefly introducing who we are and what we do for those of you who may be new to Aware in our industry.

Speaker 2

Aware is an identity platform partner working to enhance trust in an increasingly connected world. Our mission is to balance security and the experience through technology for the few and at scale. We reduce fraud and enable compliance and security needs as well as improve business efficiencies through our offerings that address identity challenges of today while preparing for identity challenges in the future. Over the last 30 years, we've led with deep rooted systems level, technical expertise and algorithms trained on the most diverse operational datasets in the world. Our reputation in the biometric industry has earned us trusted spots with many governments.

Speaker 2

And today, our technology can be found and expanding in all three branches of the U. S. Federal government and more than 20 financial institutions in over 150 law the Corporate Agencies Worldwide. Our technology, which spans 4 technology platforms, has been deployed by more than 60 partners in more than 20 countries And while we cherish our roots and work hard to maintain our loyal customer base, we have actively shifted the company over the last 3 years. A significant emphasis and shift towards recurring revenue, which hit approximately $10,000,000 in 2022 and is continuing to build in 2023.

Speaker 2

For the Q2 of 2023. In Q2, we focused largely on protecting, securing, expanding our recurring customer base through the product enhancements and improving our partner centric sales strategy. This year, we renewed our largest Noemi customer for another 3 years. And in Q2, we continued to expand the scope and size of that contract. We also secured our largest EME and their banking customers with our new upgraded biometric and identity verification platform and an additional use case along the way.

Speaker 2

Lastly, as the quarter closed, we signed a 5 year $5,000,000 contract with options up to $8,000,000 which include a the facial recognition upgrade to our largest BioSP customer. I'll let Craig go into more detail on the progress we've made expanding the base, But I want to highlight a few more proof points of progress and success from this quarter. We signed several quality commercial customers in Latin America And we expect these Avis contracts to start generating revenue in Q3. The new logo signed in Q2 Our testament to the confidence corporations and the governments have in Aware's technology to protect both consumers and nations alike. The key drivers behind our success securing and protecting the base this quarter have been our recently implemented customer success focus and processes, which Craig will to talk about more in-depth later as well as a few product enhancements we recently rolled out.

Speaker 2

With security challenges evolving every day, it's critical we are constantly improving and adapting Aware's technology to continue providing best in class security. This quarter, we focused on development efforts reinforcing the capabilities of Aware ID's facial authentication, improving Noemi's liveness detection excellence and upgrading our orchestration to address new identity verification use cases with document authentication. Given the enhancements to KnowMe and Aware ID, We are confident Aware is well positioned to capture additional market share in both existing and new use cases. In fact, these updates already have helped us secure contracts mentioned previously. With an improved partner centric sales strategy, Now I'll turn the call over to Dave to walk us through our financial results for the Q2 before discussing our initiatives and outlook for the remainder of 2023 and beyond.

Speaker 2

Dave, over to you.

Speaker 3

Thank you, Bob. Good afternoon to everyone on the call. Turning to our financial results for the Q2 ended June 30, 2023. Total revenue was $3,200,000 compared to $4,300,000 for the Q1 of 2023 $4,200,000 the Q2 of 2023, recurring revenue was $2,100,000 or 65 percent of total revenue. The company's call.

Speaker 3

The $2,100,000 in recurring revenue was down 32% sequentially due to contract renewal timing. Looking at our operating expenses, our Q2 of 2023 operating expenses were $6,100,000 the company's call. Slightly down from $6,200,000 in the prior quarter and up from $5,600,000 in Q2 of last year. Operating loss for the Q2 of 2023 was $2,900,000 compared to $1,900,000 is the Q2 of 2023, GAAP net loss totaled the company's call today. 2 point $7,000,000 or $0.13 per diluted share compared to a GAAP net loss of $1,600,000 or $0.07 the company's earnings call.

Speaker 3

Turning to the call today is the call. Thank you, sir. Our Our adjusted EBITDA loss for the quarter, which we reconciled to GAAP net loss in our earnings release, conference call. Turning to today's conference call. This conference call totaled $2,400,000 which compares to adjusted EBITDA loss of $1,400,000 in the prior quarter and a loss of the $25,100,000 in cash, cash equivalents and marketable securities compared to $27,300,000 at the end of the prior quarter.

Speaker 3

While our cash position remains strong, we continue to optimize our cost structure to align with our business needs. Furthermore, our robust cash position allows us the flexibility to evaluate all high ROI opportunities that have the potential to drive scale is the conference call. This completes my financial summary. Now I'd like to turn the call over to Craig to discuss the progress we're making on our go to market strategy. Craig?

Speaker 4

Thanks, Dave. It's a pleasure to be here with you all today. We are seeing increasing interest for Aware's biometric solutions across all our verticals, which is reinforced by the sequential improvements in the fidelity is the In order to capitalize on the high quality opportunities flowing through the pipeline, we are focused on our optimized go to market strategy, by hiring the right people and shifting resources towards more customer facing revenue streams. This quarter, we continued building out these efforts to protect the base by cementing our customer relationships through contract expansions and renewals. Our customer success team has done a fantastic job maintaining customer relationships and upselling contracts.

Speaker 4

In fact, this quarter, one of our larger OEM partners the company's largest bank in Latin America meaningfully increased both their usage the and partners to counteract deals being pushed out due to the macroeconomic environment as well as introduce usage based pricing. Is the Q1 of 2019. We expect to see these pressures ease with some deals getting close to closing. One contract in particular is a large government customer It's important to note that contracts are not disappearing, just sliding into later quarters. The A more recent evolution of our go to market strategy was the introduction of usage based pricing, which the industry has been trending towards.

Speaker 4

Usage based pricing not only allows our team to accelerate the sales process, but will also be a big push for our software services the and subscription based revenues. This reevaluated sales strategy enabled us to close the contract and move to onboarding faster with a very significant airport the security player in Spain, who will positively impact our subscription based revenue in the coming quarters. By implementing this pricing tier, we can now cater to the customers' needs, allowing us to sign on partners and customers of all sizes in all types of macro environments. Lastly, almost half of our pipeline is partner driven. As well as to procure partners that could drive organic growth and increase our market share.

Speaker 4

In Q2, we signed 4 additional partners in Latin America Which was the case with one of these new contracts. We are proactively seeking potential partners in the biometric space with active accounts to lay the groundwork for future business. Moving forward, we're aiming to launch a formal the 6th program in the latter half of Q3. This new program will be equipped with onboarding tiers, partnership incentives And additional marketing to help fuel partner engagement. Another key development Bob touched on earlier was the product improvements for Aware ID's the functionalities of these two solutions allowing our sales and partner teams to go to market with more robust and secure technologies.

Speaker 4

Already, these enhanced capabilities are generating significant momentum for Knowme and renewing the market's enthusiasm for Aware ID, especially in document verification. Our customer success team is doing a tremendous job upselling the new functionalities the and recently renewed a customer for another 5 years. Now, I would like to turn the call back to Bob for additional insights into our key business drivers. Bob?

Speaker 5

Thanks, Greg. Backed by an

Speaker 2

enhanced product portfolio and optimized sales strategy, the leadership that we expect to greatly contribute to recurring revenue and lay the foundation for additional prospects. With a healthy pipeline of quality opportunities the company's call. In an optimized enterprise sales strategy, we are reiterating our expectation to increase total revenue and annual recurring revenue or ARR by 15% in 2023. We also continue to expect operating cash flow exiting 2023 to be neutral, which means we'll be managing both inflows and outflows towards profitability, while taking into consideration cash interest deliveries and believe we are well positioned to achieve our cash flow goals and remain confident in our ability to grow sustainably ready to open the call to questions. Matt, please provide the appropriate instructions.

Speaker 1

Thank you,

Speaker 6

Bob.

Speaker 1

Our first question. Bob, you mentioned that one of the main focuses this quarter was to protect and expand the recurring customer base. Can you provide some additional details on contract wins secured this quarter?

Speaker 5

Sure, Matt. Since we announced our business transformation and focus on our recurring revenue model, we continue to make considerable progress we've expanded our recurring customer base. In fact, our recurring revenue as a percentage of total revenue in Q2 was 65%, Which is a 16% increase compared to the prior year period. This quarter we signed expansion and renewal contracts When I mentioned in my previous prepared remarks, we renewed and expanded our largest customer in Nomi, which is Itau for another 3 years. We also signed our biggest EME partner and their banking customers as well.

Speaker 5

And then we signed 2 new Avis contracts, one of them being our first ever SaaS Cloudavis contract, which we talked about. Another key customer we secured this last quarter was a 5 year $5,000,000 contract with our largest Biosp customer, and this will be recognized over the next 5 year period. This contract improves our annual recurring revenue, but also expands the capabilities of the customer system And it introduces facial recognition in addition to fingerprint capability. And this contract represents a significant win for Aware and reaffirms the confidence the customer's have in our technology. And we're just continuing to build our foundation for future recurring revenue growth With each new contract signed and we're excited about the second half of twenty twenty three and believe we have several promising opportunities in our pipeline.

Speaker 1

Thanks, Bob. What was recurring revenue for the quarter and how much recurring subscription revenue and how much was recurring maintenance revenue?

Speaker 6

Yes, I'll take that Matt. So our recurring revenue in Q2 was about $2,100,000 that's broken out to about $1,600,000 of maintenance and the balance was our consumption or subscription based revenue.

Speaker 1

Thanks, Dave. Bob, you talked about the fidelity of the pipeline improving. Can you talk about what this means and what Aware needs to do to convert its pipeline?

Speaker 5

Yes. So I'm taking a step back and looking at the pipeline on a trailing 12 months ago, we've seen a big improvement in the quality of the opportunities. We took a significant motion to implement rigorous opportunity qualification for the new opportunities And we're seeing more through our established and growing customer base. So we're actually seeing through our customers that we've already signed up as partners So we have a better grasp on our needs and business challenges, so that we can solve that through our different products. And then just mentioned through Craig's efforts, we're seeing more expansive deals being negotiated as well as increased opportunities to secure new partnerships that will significantly expand our wallet share of the market.

Speaker 5

Craig already mentioned this in his remarks, but his team is laser focused

Speaker 1

Thanks, Bob. Next question, how are operating expenses trending this year?

Speaker 6

Yes. Our operating expenses have increased sequentially this quarter, I mentioned that earlier. And that's mainly due to investments in our sales team. We onboarded a new team of CSMs and BDRs in Q1. So those costs have increased, But we don't anticipate adding any significant OpEx in the second half of twenty twenty three.

Speaker 6

In fact, we're expecting our OpEx will be Flat to downish in the 3rd Q4. We're of course working towards cash flow neutrality.

Speaker 1

Thanks, Dave. Next question is for Craig. What have been the driving forces behind the sales team's success in the recent bookings?

Speaker 4

Sure. I think our success is really a culmination of the groundwork that we have laid down Over the last several quarters or last few quarters, the introduction of our usage based pricing, coupled with the product enhancements that we made to KnowMe and Aware All of these things have really helped drive the bookings as well as Since I started working at Aware, we've worked to really perfect and we've talked a lot about this, our customer success team and our partnership program. We now believe we have the right people, processes and best in class products to position our sales and CS teams for success. I know we've talked a lot on the improvements we made to Nomi and Aware ID, so I won't rehash those details, but the combination of more robust products And the debut of usage based pricing enabled our sales team to market to more customers than we ever have before and resulting in, in some cases larger and higher quality deals that we signed in Q2.

Speaker 1

Thanks, Craig. Our next question is how is the competitive environment?

Speaker 5

Greg, do you want to take this one? Yes, sure. Thanks Bob. The competitive environment is It

Speaker 4

is frothy and I didn't say a word. I mean, we are continuing to aggressively pursue deals. Everything is competitive right now in this market. Despite pressures on functionality, we are winning lucrative contracts displacing competitors around the globe regarding marketing opportunities, we are seeing the improvements in Nomi and Aware ID gaining a lot of traction with commercial customers in Latin America and the Middle East In particular, Brazil and Turkey specifically. Not only did we sign 4 new partners in Latin America, but we also extended and upsold Several deals like the one in with InTao in Brazil that Bob mentioned earlier.

Speaker 4

With the addition of contract management is the We really believe there are significant growth opportunities overseas and in these new verticals.

Speaker 1

Our next question, can you provide an update on the share repurchase program?

Speaker 6

Yes, I've got that Matt. In short, our previous announced plan is in place. The As a recap, in March of 2022, we announced a share repurchase program that would allow us to buy up to $10,000,000 of our common stock. So that's active through the end of 2023. And as of June 30, we repurchased about $1,700,000 worth of shares.

Speaker 1

Thanks, Dave. We've got a 2 part question. First, can you talk more in-depth about the improvements that were made to Aware ID and Noemi? The second question is, since deploying the product enhancements mentioned earlier, are you seeing increased traction for Noemi and Aware ID?

Speaker 5

All right, Matt. I'll take the first part and then I'll let Greg talk about the market's response. So just in general, today's security challenges are consistently and constantly evolving. And after we did a lot of voice of the customer speaking with a few customers, we continued to evolve, we've aligned our product market fit. So we identified a few areas that Nomi and Aware ID Solutions could benefit from making them more secure, Reducing additional customer friction and expand our use cases with focus on some new use cases.

Speaker 5

For Knowly, we concentrated on improving its liveness excellence to make it more robust, while we revamped Aware ID's infrastructure to strengthen its facial recognition and document authentication from the bottom up. And now that we've enhanced product capabilities, we're seeing improved market fit For both Aware ID and Naomi, and I'll let Craig talk a little bit more about what he's saying as well.

Speaker 4

Is Sure. Thanks, Bob. With the stronger and more capable products, our sales team is going to market with these products. And specifically, What we're doing in SaaS, both with Aware ID and Avis, is really opening up new markets for us. We incorporated a lot of the feedback into our products, specifically around document authorization in some places and Layered this all into our biometric portfolio and the efforts are really beginning to pay off across the company.

Speaker 4

There is a renewed enthusiasm not just for KnowMe and Aware but also for Aware, the company, which we capitalized to expand its new verticals and geographies and increasing our market shares,

Speaker 1

capital allocation plans for the second half of twenty twenty three.

Speaker 6

Thanks, Matt. Our capital allocation is is about the same as it has been. We finished Q2 with about $25,000,000 a little over $25,000,000 in cash and marketable securities. So, this quarter, we continued to capitalize on the high interest rates in the market. And so we increased our investments in highly liquid marketable securities as you'll see from our balance sheet.

Speaker 6

For the remainder of 2023, We plan to maintain a strong cash position with no debt and given us the freedom or optionality to evaluate Any strategic opportunities that could help us drive some meaningful scale and accelerate our growth.

Speaker 1

Steph, we have another one for you. It's a multipart question. Can you provide the current estimated go live date for the large scale Avis implementation that you referenced the Q3 and Q4 have any significant engineering services revenue from this project? Do you expect any significant recurring revenue from the Avis project? And lastly, if so, in what quarter do you expect it to hit the top line?

Speaker 6

Yes. Thanks, Matt. That's a long one. So to be clear, what we're talking about here is The Avis that was referenced in Q4 and Q1 is our first cloud Avis. We talked about during the March call And then announced it as Miami Valley in our press last week.

Speaker 6

So we are still anticipating that contract to go live this summer, Yes. I think the thing to note is that unlike some of our historical programs that included significant customization and engineering services, Our Aware Avis deployments, especially the cloud Avis, includes some configuration work to implement, but they're not expected to require significant engineering services, mainly software deals. So this contract will have a positive impact on recurring revenue once deployed. I think the other thing to note is Our timing of awards and adoptions mean that Aware has quite a bit of quarterly variation in financials. And that's why I just want to emphasize to our investors that we continue to focus on the full year outlook, not so much the quarters.

Speaker 1

Thanks, Dave. We have another multipart question. The PR announcement for the A SAFER WALK app on May 30, 2023. Since that was the last official announcement of closing on new business, is it fair to say that no other business of that magnitude has closed since that date? Can you provide any comment on the number of downloads of the ASA for Walk app and the likely revenue associated?

Speaker 1

My expectation is that the associated revenue with that specific application will be very small. However, if we close business of similar magnitude every day, it may add up to a significant revenue eventually. And finally, are we closing small deals on a nearly daily frequency?

Speaker 5

So I'll take the first part and then I'll I'll ask Greg to add some more color. But as I've said and we've said before, we aren't able to issue press releases on all awards, Nor would we plan to. Often this is limited to solution. Customer confidentiality agreements And we typically focus our award releases on deals that are slightly in a new area of initial adoption like SafeWork release. Demonstrates a use case in a customer facing shared services application.

Speaker 5

Our choice to not issue a press release regarding an award should not be considered indicative of not winning awards or the only awards that we received. Greg, you want to add some more color on the awards and opportunities coming forward?

Speaker 4

Absolutely. We secured several bookings in Q2. And since announcing our partnership with the Safe of Work and our first SaaS the conference call. This Miami Valley deal is a 5 year deal that will have a a huge impact on our recurring revenue as we continue transitioning to a SaaS based platform. We can't formally announce every the contracts on what we are constantly winning new contracts as the fidelity of the pipeline continues to improve.

Speaker 4

The opportunity type, size and targets vary greatly based on the market and by region. This is where I think trying to pigeonhole it into 1 or the other is not our business We continue to build on a very strong enterprise foundation globally. We have also seen a surge in the Avis pipeline is this mid market for Avis has really opened up with some vendors moving out or narrowing their focus. The ability for organizations to leverage cloud Avis, for example, opens up opportunities for a customer base that was out of our reach 12 months ago. Is and finally with Aware ID, it's a new market and although deal size may be small at the beginning, it does open the door for these customers is the company's ability to grow substantially as their business grows through our usage based pricing model.

Speaker 4

So, Schafer Walker is a really good example of this type of customer, We are also seeing similar engagements in Internet Banking, e Commerce, Education and Gaming Markets.

Speaker 1

Thanks, Craig. Our next question, are there any other large deals on the horizon that can make a significant contribution to revenue and earnings in addition to the implementation you just mentioned. If yes, what is the approximate probability they'll have an impact in 2023?

Speaker 4

So we have several 6 figure deals. We have 1 to 2 7 figure deals that we are targeting right now for and forecasting for 'three and 'four, Q3 and Q4 All of these opportunities, they have specific compelling events to get signed and implemented this year. So we are very confident we will get them done and then it will have a positive impact on our revenue targets for 2023.

Speaker 1

Great. Another question on that line. Your annual outlook implies some pretty drastic revenue growth for the rest of the year. What gives you confidence you will make it? How much of the outlook for the next two quarters is covered by signed contracts?

Speaker 6

Yes, that's a great question, Matt. So Bob and Craig have already talked a lot about the success we've with these recent bookings and the improved pipeline. Craig just walked you through a bit of it. But let me try to be a little bit more specific. So our first half results were below our growth targets obviously and that's primarily due to the timing of awards and delivery as we've highlighted here.

Speaker 6

But our second half will benefit from a significant increase in recurring revenue, which was already booked. Concludes the large contract announced in our earnings release, the expansion of renewals that we mentioned previously on this call, is the cloud Avis delivery underway that Craig was just talking about. So on top of these recurring revenues, we also are expecting a spike in licensing revenue across the second half. Is Craig talked about a few 6 and 7 figure deals And a much better pipeline. So the combination of those two things gives us good confidence in the second half of the year.

Speaker 1

Thanks, Dave. Our next question, what sort of growth can we expect in 2024?

Speaker 6

Yes. I'll take that, Matt. And unfortunately, the answer is that 2024 guidance At this point in time, there's a lot left in 2023. And when we're ready, we'll we'll come out with 2024 guidance.

Speaker 1

Thanks, Dave. Our next question, to what extent are you pitching new customers directly versus the resellers or partners?

Speaker 4

Sure. I'll take that one. This is Greg. So Just over 50%, I think Bob mentioned this, 50% of our pipeline is through partners. It is absolutely a key differentiator.

Speaker 4

We are winning partners away from our competitors that are helping us get into and solidify in markets. So we really look at our partners as a a significant differentiator for us. And even when we are pitching through partners, We are very involved in the process. And again, I talked a little bit about varying by markets and regions. Is We are a global company, so having premier partners tightly integrated with us All over the world gives us reach much bigger than what we can do just going direct.

Speaker 4

So right now, it's just over 50% of our pipeline is through partners. And a lot of our Aware ID right now is very direct

Speaker 1

is Thanks, Craig. The conference call. I'd now like to turn the call back over to Bob for closing remarks.

Speaker 5

Yes. I just want to thank everyone for joining us on the call today, and I also want to thank our employees, partners, shareholders for their continued support. And as a reminder, we may learn more about our strategy and investor a conference call. We look forward to updating you on Aware's progress on our next call. Matt?

Speaker 1

Thanks, Bob. I'd like to remind everyone that the recording of today's call will be available for replay via link in the Investors section of the company's website. Thank

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